Examined: the case for fixed income in a hard or soft landing
This morning the ONS published its monthly update on the UK labour market. Of all the G7 countries, the UK has had the most puzzling labour market dynamics post pandemic, as we discussed in a previous blog ( Growing signs that the UK labour market is weakening ). These include, on top of other factors, a very large number of people not being able to work due to long-term illness and the impact of Brexit on immigration.
The result has been high and stubborn wage-inflation numbers, which make the forecasts of a peak in monetary policy rates, and cuts thereafter, a bit murkier than in other regions. And today’s numbers confirm what we alluded to in the earlier blog. The labour market is weakening, and that this is good news for the Bank of England (BoE).
Starting with the ‘earnings and employment from PAYE real time information’ report, the payroll number in September saw a reduction of 11,000 jobs compared to August. This is the third month in a row of declines.
According to the same survey, median monthly pay in the UK was £2,264. After a volatile summer due to NHS and other government wage increases, the monthly number in September is virtually the same as the one in May. Compared to September 2022, wages have increased by 5.7%, which is not what the BoE is looking for, but it is markedly lower than the average weekly earnings (AWE) data, which we will discuss next.
The main headline from this report was that AWE grew at a rate of 8.1% in the trimester to August (this survey lags the PAYE one by one month). This was lower than the 8.3% Bloomberg consensus. What is more important in our view is that the moving trimester data includes a 19.8% and 10.3% year-on-year growth in public sector earnings in June and July, mainly because of the one-off increases for NHS personnel. If we just compare August 2023 with August 2022, we can see that public sector pay growth falls to a more reasonable 7.4%, which in turn translates into AWE for the whole economy growing at a rate of 6.9%.
Looking at just the private sector, AWE might provide a better picture of underlying wage pressures given the one-offs in the public sector data (which accounts for 19% of the whole economy). Private sector AWE grew at 6.8% in August. The month-on-month data, though, did so at a pale 0.15%, lower than the 0.45% in July. We will seek confirmation of the possible AWE stagnation trends in upcoming reports.
In conclusion, the UK labour market continues to move in the right direction in this unusual financial world where bad news might be good news. We say “might” because the labour market cooling off is good news provided it keeps coming slowly but surely off the peaks in a controlled manner. This is what we are seeing so far, which we believe is good news for the BoE. We, of course, remain attentive to the data that might show an acceleration (or stagnation) of these trends.